One of my favorite sites to check out is Inc.com because it’s all about starting businesses and the like. Today I ran across an article titled 30 Under 30. It profiles 30 different young entrepreneurs and what ventures they’re succeeding at.

There’s a clothing store, an innovative way around the traditional oxygen tanks, and a website that provides information about parking garages in the northeast.

One of my favorites was a guy who started baking cookies in his apartment at college and now runs a cookie delivery service. It goes to show you that you don’t need a wildly spectacular new product or a flashy never-before-thought-of service in order to start a successful business.

I’d go check out the article and maybe it’ll give you an idea for yourself or prompt you to start something.

Budgeting is an activity that some people actually enjoy. Most people, however, detest budgeting or are at most indifferent towards it. Whatever your feelings about the subject are, it’s important to at least understand the objective and the general principles.

Whether you’re in business or just managing your own personal finances, the goal of working to a budget is to increase wealth through careful planning. This is an important concept to grasp because there is a large misconception among many that budgeting is there just to make sure that we don’t spend more than what we earn. This is very important, but budgeting is much more than that. The goal of any business is to increase shareholder wealth. This can also be true for your own finances.

I’m not going to tell you how you should budget because it’s different for everyone, but I will explain what some people do and then how I approach the subject. Let’s first talk about traditional budgeting. This is the more tedious form of budgeting where you scrutinize different categories of your spending and budget certain amounts for each of these categories. For example, you might decide that you’ll allocate $300 per month for food and another $200 for entertainment and so on down the line. You then make sure that the total of all expenses are less than your income. Also, don’t forget to budget in savings and investing. If this is your style, then more power to you.

Now let me explain how I “budget”. I’m not a big fan of getting so detailed into planning exactly how much I’m going to spend in certain categories. Instead, I take a certain percentage of all income and put it towards charitable giving and into savings. I then take another percentage and allocate it for investing. After this, whatever is left is free to spend on everything else including living expenses and entertainment. Doing things this way simplifies the process and it ensures that my top priorities are always being met.

However you choose to budget, it needs to be something that you’re comfortable with and that you will stick with. It does no good to start, only to later give up on it because it’s too complicated or time consuming. So have a go at it…

In previous posts I’ve written about market capitalization and the P/E ratio, and the basics of the stock market. Today I want to introduce another concept used to analyze a company to determine whether you’d like to invest in it.

Return On Equity (ROE) is a measure of a companies ability to profitably employ the money that shareholders have invested. This measure is calculated as follows:

ROE = Net Income / Shareholder’s Equity

A company’s net income may be obtained from the income statement while the shareholder’s equity is reported on the balance sheet. You don’t actually need to calculate this yourself, though, since many financial sites such as Morningstar will provide it for you.

So, now that you have this number, what does it mean for you? Like I stated earlier, it measures how profitably a company employs its investors money. It should be obvious that the higher this number the better; however, there’s a little more to it than that.

Say a company has an 18% return on equity (General Electric is one example). Let me be clear now; this does not mean that you will earn 18% on the money you invest. If you remember from an earlier post, when you buy a stock, you’re buying it on a secondary market, and it has no effect on the company’s financials. What you are doing is buying an ownership interest in the company that then entitles you to any FUTURE earnings and growth.

This is where the 18% ROE comes into play. Now that you own a few shares of a company, the company will hopefully post a profit from which you determine what’s called Earnings Per Share (EPS). These earnings belong to you as the shareholder. The company now has to make the choice of what to do with these earnings.

There are a few main options. The company may announce a dividend, in which case you will be paid out a portion of these earnings. The company may choose to buy back it’s own stock with these earnings (a topic for another day), or it may choose to reinvest the earnings back into the company which is what we call retained earnings.

It is this last option that we are interested in when we talk about Return On Equity. Based on our example of an 18% ROE, we can expect the company to earn an 18 percent return on this reinvested capital. It is this compounding year after year of profitably retained earnings that can make one wealthy.

There is an upfront cost to get into a stock because of the current market valuation. Looking back at the P/E ratio, if a company trades at 20 times earnings and has earnings of $2 a share, you can expect to pay about $40 per share. If you buy this stock, you can view the earnings as your return on your investment, in this case $2 / $40 = 5%. This doesn’t look like anything spectacular, but it’s the $2 in earning that will compound at the 18% Roe.

In the second year you could reasonably expect earnings increase to $2.36 (2 x 1.18 = 2.36). This then increases your return to 5.9% (2.36 / 40 = 5.9%). After 10 years of the earnings compounding, your $40 initial investment is now returning over 26%.

Obviously there are assumptions being made such as a sustainable ROE and earnings growth and the like, but it’s the concept that I want you to understand. It’s another tool to put in your financial toolbox. Hopefully, this has provided some insight into the investment world and will help you in the future.

I’m reading a book right now entitled Buffettology written by Mary Buffett, Warren Buffett’s former daughter in law. There is a chapter titled The Myth of Diversifications Versus the Concentrated Portfolio. It portrays a very different perspective on investing that what is generally purported.

“Warren believes that diversification is something people do to protect themselves from their own stupidity. They lack the intelligence and expertise to make large investments in just a few businesses, so they must hedge against the folly of ignorance by having their capital spread out among many different investments.”

While I don’t much care for the tone of this quote, I do happen to agree with it. Most people don’t want to spend any more time than necessary on choosing their investments. All you have to do is look at the very lucrative mutual fund industry to see that this is the case. And when I say “very lucrative”, I’m not talking about the individual investor, but instead, the fund managers.

It’s also interesting to note that the bulk of the gains in these funds usually come from a few well performing investments. Proponents of diversification will say that you need to own many investments because you don’t know which one’s will be the outstanding performers. Those like Warren Buffett will say that you should learn the basics and then some of investing and do sufficient research. This way you will only invest in very secure and highly profitable businesses.

You can choose the style that you feel most comfortable with, but it is certainly food for thought. Why is it that we’ll spend hours upon hours researching all the features and specifications for the new LCD TV we want, and we’re content to just deposit our money into a fund where we most likely don’t even know what it’s invested in. No matter what style you choose, it can’t hurt to learn more about how to choose good investments.

People often throw this phrase around and it’s usually used in context with earning interest or compound interest, but what does it actually mean? It’s not really as complicated as you might think.

The concept of the “time value of money” is the idea that money in the present is worth more than the same amount of money in the future. It’s based on this basic concept that you’ll hear terms such as “net present value”, “future value”, “discounting”, or “internal rate of return”. Maybe I’ll get into those concepts in the future, but for now let’s stick with the basics.

To explain the time value of money, let’s take an example. Say that the interest rate you can earn on your money is 5% and you have $1,000. At the end of one year you’ll have $1,050. This also works conversely in that $1,000 received a year from now is really only worth $952.38 today.

Companies all over know of this concept and try to use it in their favor all the time. Take the AdSense program, or any other ad network, for example. You won’t get your balance paid out to you until you reach a certain threshold, and even then they take a month or so to actually get the payment to you. They want to hold on to the money as long as possible.

Insurance is probably the best example of the concept of time value of money. Say that you went out and bought a $1 Million dollar 20 year term life policy. The insurance company wants your money in the present (in the form of premiums) and then will pay you out at some point in the future. Assuming an investment interest rate of 10% and a time horizon of 15 years, this $1 Million dollar policy is only presently worth a little under $240,000.

You don’t really need to have a deep understanding of this concept in order to make use of it. Simply put, money in the present is worth more than money in the future.

We all know that credit card debt is some of the worst kind. So many people either have struggled or are struggling with it. In either case, credit cards use is widespread and is in some cases almost a necessity. If you’re going to use credit cards, you need to realize that you don’t always have to just accept the terms that the issuer provides. A credit card is a financial product and you can negotiate the terms.

Whether you carry a balance on your cards or not, you can call the company and ask for certain terms to be changed. You’ll want to request that your interest rate be lowered. When you ask this, make sure that you ask for a specific rate that you would like to have it lowered to, like 6%. They may not immediately give you this rate, but you’ll never know until you ask. Remember, you have the final trump card in your hand because you can cancel the card at anytime (this may not be an option for you if you have a balance, but you could transfer it to a lower rate card).

You can also call to have your credit limit raised or lowered. Some people want to have higher limits because it gives them easy access to funds in case of an emergency. Others would like to maintain a lower limit because of the temptation that a large limit provides. Whatever you’d prefer, all you need to do is call the company and request it. Again you’ll never know until you ask.

What’s most important, though, is to realize that you’re dealing with YOUR finances and you shouldn’t let a credit card company take charge of them. If there’s something you’d rather have or like to change, take a moments and ask for it.

I read a good article over at Get Rich Slowly that talks about investing in broader terms than what is usually thought of as investing. Whenever someone talks about investing, most people invariably think of the stock market, bond market, or mutual funds. However important these types of investments are, they aren’t the only way to make money on your money.

Many personal finance gurus make assumptions about how much money you can accumulate if you invest X number of dollars a year for so many years and earn, say, a 10% annual return. The obvious question that many then ask is where can I earn 10% consistently?

It may come as news to a lot of people, but stocks and bonds are not the only way to earn such returns. As I’ve mentioned before and this article points out, there are many other ways or opportunities through which we can earn great returns. You’ve got to keep your eyes open and think creatively sometimes, but it can be done.

If you’ve taken advantage of a unique opportunity that you’d like to share we’d love to hear about it. Tell us about your experiences in the comments.